by charles t horngren srikant m datar madhav rajan
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Arizona Western College
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Solutions Manual for Cost Accounting 14th
Edition by Horngren Datar Rajan
CHAPTER 2
AN INTRODUCTION TO COST TERMS AND PURPOSES
2-1 A cost object is anything for which a separate measurement of costs is desired. Examples include
a product, a service, a project, a customer, a brand category, an activity, and a department.
2-2 Direct costs of a cost object are related to the particular cost object and can be traced to that cost
object in an economically feasible (cost-effective) way.
Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost
object in an economically feasible (cost-effective) way.
Cost assignment is a general term that encompasses the assignment of both direct costs and indirect
costs to a cost object. Direct costs are traced to a cost object while indirect costs are allocated to a
cost object.
2-3 Managers believe that direct costs that are traced to a particular cost object are more accurately
assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are
less certain whether the cost allocation base accurately measures the resources demanded by a cost
object. Managers prefer to use more accurate costs in their decisions.
2-4 Factors affecting the classification of a cost as direct or indirect include
• the materiality of the cost in question,
• available information-gathering technology,
• design of operations
2-5 A variable cost changes in total in proportion to changes in the related level of total activity or
volume. An example is a sales commission that is a percentage of each sales revenue dollar.
A fixed cost remains unchanged in total for a given time period, despite wide changes in the related
level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a
given time period (such as a year) regardless of the number of units of product produced on the
machine.
2-6 A cost driver is a variable, such as the level of activity or volume, that causally affects total costs
over a given time span. A change in the cost driver results in a change in the level of total costs. For
example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-
vehicle assembly line.
2-1
,2-7 The relevant range is the band of normal activity level or volume in which there is a specific
relationship between the level of activity or volume and the cost in question. Costs are described as
variable or fixed with respect to a particular relevant range.
2-8 A unit cost is computed by dividing some amount of total costs (the numerator) by the related
number of units (the denominator). In many cases, the numerator will include a fixed cost that will
not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost
by activity or volume change to predict changes in total costs at different activity or volume levels.
2-9 Manufacturing-sector companies purchase materials and Ashtonnents and convert them into
various finished goods, for example automotive and textile companies.
Merchandising-sector companies purchase and then sell tangible products without changing their
basic form, for example retailing or distribution.
Service-sector companies provide services or intangible products to their customers, for example,
legal advice or audits.
2-10 Manufacturing companies have one or more of the following three types of inventory:
1. Direct materials inventory. Direct materials in stock and awaiting use in the
manufacturing process.
2. Work-in-process inventory. Goods partially worked on but not yet completed. Also called
work in progress.
3. Finished goods inventory. Goods completed but not yet sold.
2-11 Inventoriable costs are all costs of a product that are considered as assets in the
balance sheet when they are incurred and that become cost of goods sold when the
product is sold. These costs are included in work-in-process and finished goods
inventory (they are “inventoried”) to accumulate the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These costs are
treated as expenses of the accounting period in which they are incurred because they are expected
not to benefit future periods (because there is not sufficient evidence to conclude that such benefit
exists). Expensing these costs immediately best matches expenses to revenues.
2-12 Direct material costs are the acquisition costs of all materials that eventually become
part of the cost object (work in process and then finished goods), and can be traced to
the cost object in an economically feasible way.
Direct manufacturing labor costs include the compensation of all manufacturing labor that can be
traced to the cost object (work in process and then finished goods) in an economically feasible way.
Manufacturing overhead costs are all manufacturing costs that are related to the cost object (work in
process and then finished goods), but cannot be traced to that cost object in an economically feasible
way.
Prime costs are all direct manufacturing costs (direct material and direct manufacturing
labor).
Conversion costs are all manufacturing costs other than direct material costs.
2-13 Overtime premium is the wage rate paid to workers (for both direct labor and indirect
labor) in excess of their straight-time wage rates.
2-2
, Idle time is a subclassification of indirect labor that represents wages paid for unproductive time
caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.
2-14 A product cost is the sum of the costs assigned to a product for a specific purpose.
Purposes for computing a product cost include
• pricing and product mix decisions,
• contracting with government agencies, and
• preparing financial statements for external reporting under generally accepted accounting
principles.
2-15 Three common features of cost accounting and cost management are:
• calculating the costs of products, services, and other cost objects
• obtaining information for planning and control and performance evaluation • analyzing
the relevant information for making decisions
2-16 (15 min.) Computing and interpreting manufacturing unit costs.
1.
(in millions)
Supreme Deluxe Regular Total
Direct material cost $ 89.00 $ 57.00 $60.00 $206.00 Direct manuf. labor costs 16.00 26.00 8.00
50.00
Manufacturing overhead costs 48.00 78.00 24.00 150.00
Total manuf. costs 153.00 161.00 92.00 406.00
Fixed costs allocated at a rate of
$15M÷$50M (direct mfg.
labor) equal to $0.30 per dir.
manuf. labor dollar
(0.30 × $16; 26; 8) 4.80 7.80 2.40 15.00 Variable costs $148.20 $153.20 $89.60
$391.00
Units produced (millions) 125 150 140
Cost per unit (Total manuf.
costs ÷ units produced) $1.2240 $1.0733 $0.6571
Variable manuf. cost per unit
(Variable manuf. costs
÷Units produced) $1.1856 $1.0213 $0.6400
(in millions)
Supreme Deluxe Regular Total
2. Based on total manuf. cost per unit
($1.2240 × 150;
$1.0733 × 190; $0.6571 ×220) $183.60 $203.93 $144.56 $532.09
2-3
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